BRAZIL Law and Practice Contributed by: Fernanda Levy, Aline Bauermeister, Rodrigo Menezes and Fabiana Fagundes, FM/Derraik
5.2 Securities Types of Long-Term Equity-Based Incentives The most-seen types of equity-based incentives in the Brazilian VC market are as follows. Stock options Here the participant is granted, or purchases, options to acquire equity interest in the com - pany at a future time, for a predetermined price (strike price). For the effective exercise of this right, the participant must comply with certain conditions, which may relate to time (vesting), achievement of goals or occurrence of a liquidity event, among others. Partnership Here the company offers the participant the opportunity to become a partner, acquiring a direct or indirect stake in the company, at market value. Payment of the purchase price is generally made in instalments. Restricted stocks or units Restricted shares, called RSAs or RSUs ( “restricted share awards” and “restricted share units” ) represent a type of long-term incentive according to which there is no investment or financial consideration on the part of the par - ticipant. The company grants the shares or units free of charge, in advance or after the fulfilment of a certain period (vesting). Unlike options, which must be exercised, RSUs are typically converted directly into stock upon vesting, which may then be subject to further mandatory selling periods or holding requirements. This is also a strong incentive for employees to remain with the com - pany, as they gain full ownership of the shares after the vesting period.
Phantom shares These instruments aim to fulfil the same eco - nomic purpose as options or restricted stocks, but with settlement in cash and not in shares. The choice of long-term incentive that best suits the start-up must take into account a number of factors, such as: • how employees are hired; • the business model; and • in particular, the company’s stage of develop - ment. Stock options or similar instruments usually vest over a period of time to encourage employees to remain with the company. A common vesting schedule is for four years, with a one-year cliff (meaning that no vesting occurs until the end of the first year), followed by monthly or quarterly Standard Terms Vesting schedule After vesting, employees typically have a set period during which they can exercise their options – eg, ten years from the grant date. Exercisability Options are generally exercisable once vested, but may have additional conditions based on company performance or milestones. Claw-back provisions Some incentive plans include claw-back pro - visions that allow the company to reclaim the value of equity compensation under certain con - ditions, such as for misconduct or breaches of contract by the employee. pro rata vesting. Exercise period
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